Injecting clarity into economic corridor

WEB DESK: Minister for Planning, Development and Reforms, Ahsan Iqbal, clarified to the Senate Standing Committee on Planning, Development and Reforms that the government of Pakistan had nothing to do with funding of $ 35 billion worth energy projects under the China-Pakistan Economic Corridor (CPEC). Documents available with Business Recorder reveal that the actual commitment under the CPEC for energy projects is $ 32.66 billion and includes a wide-range of projects but with an investment not higher than $ 2 billion on any single project, implying thereby that the focus would be on coal and wind projects and not mega hydel projects.

Iqbal further claimed that these energy project loans would be commercial loans, and the remaining $ 11 billion would be concessional funding. A Business Recorder exclusive based on documents indicated that the commercial rate would be between 5 to 6 percent while the concessionary rate would be around 1.6 percent. Both these rates are more than acceptable given the fact that during the past three years the government of Pakistan has neither been able to extend sufficient funding for infrastructure development (due to its commitment to the International Monetary Fund that it would meet extremely challenging deficit targets that are at the cost of slashing budgeted development spending) nor has it been able to attract foreign direct investment in spite of numerous foreign tours by members of the country’s executive.

Private investment has been held hostage to the heavy government borrowing from the domestic commercial sector, failure to facilitate businesses accounting for a decline in our ranking in ease of doing business (compiled by the World Bank) and an overvalued rupee with the objective of understating the annual budgeted interest and principal due on foreign debt.

The modus operandi of the CPEC support was to be for the Chinese government to extend credit to Chinese companies, a usual Chinese method with respect to investing abroad, who, in turn, would engage in projects as commercial ventures. Given that CPEC projects are exclusively infrastructure development projects whose tariffs/user rates are set by the government, it is still not clear as to what would be the rate of return on these commercial ventures.

Reports, not denied or confirmed by the government, indicate that the government of Pakistan intends to set up a revolving fund to facilitate direct payments to Chinese power producing companies against purchase of electricity to help avert the possibility of payment issues emanating from the large energy sector circular debt. And, given the failure of our successive governments, including the incumbent, to eliminate the circular debt the following question arises: would the government get the general public to pay a higher tariff to keep this fund afloat as it does with respect to paying the interest on over 400 billion rupees it borrowed to eliminate the circular debt on the second-last day of fiscal 2013?

To date, the Chinese have disbursed 11.2 million dollars, a very small amount in relation to the total commitment. However, reports indicate that the slow pace of disbursement reflects the Chinese modus operandi namely not to commence projects until and unless all documents are complete including feasibility studies. The Ministry of Planning, Development and Reforms told Business Recorder that a period of six months is required for disbursement of funds by the Chinese companies which surely should be over by now given that the CPEC agreements were signed in April 2015 during the visit of Xi Jinping to Pakistan.

Be that as it may, there is a growing trust deficit between the government and members of the opposition on the CPEC routing and the location of industrial projects with the latter accusing PML-N of being Punjab-centric in implementing projects under the CPEC in an attempt to ensure an electoral win in their home province that would enable the party to form a government in the centre as well as in the largest province of the country after the 2018 elections. All-party conferences, parliamentary visits to project sites as well as several briefings by Ahsan Iqbal have failed to convince the opposition that the government is proceeding with CPEC projects in a non-partisan manner.

This promoted the Chinese Ambassador to urge the government to resolve all trust deficit issues with the opposition. In other words, this could very well also be a reason for the delay in disbursements and one would hope that the government seriously addresses these issues.